TWTR Twitter Inc

By Maureen Farrell and Liz Hoffman 

When Twitter Inc. was looking to raise $1 billion from investors earlier this month, it put out the usual calls to Wall Street banks.

The social-media company also called Vijay Culas, who works out of rented office space on a busy stretch of highway in San Mateo, Calif.

A former Goldman Sachs Group Inc. banker who hung out a shingle in 2014, Mr. Culas helped Twitter negotiate with its banks and ultimately sell a type of hybrid bond for a 1% fee, one of the cheapest offerings in recent memory.

Mr. Culas is among a handful of upstart advisers who are challenging investment banks on turf once thought impenetrable: the $7 billion-a-year business of handling complex stock-related transactions.

Jason Wood, who spent nine years at JPMorgan Chase & Co., went solo in 2013. A year later, Mr. Culas launched Matthews South, named for his Harvard University dorm.

The accounting firm Ernst & Young LLP hired David Brown, an ex- Barclays PLC banker, in 2015 to advise their clients on capital-markets deals.

Without underwriting or trading arms, these advisers say they can give unbiased judgment and help clients wrangle a horde of hungry bankers. Their pitch is resonating, especially in Silicon Valley, where finance departments tend to be less robust and more suspicious of Wall Street.

All told, Messrs. Wood and Culas have worked on one-third of the roughly 30 convertible bond sales by U.S.-listed tech companies this year, including offerings by Square Inc., Etsy Inc. and Twilio Inc., according to people familiar with the deals.

Their success is the latest sign that Wall Street's moat is shallower than it used to be. Investment banks were once one-stop shops, controlling each step of a big securities offering. Now they look vulnerable to the same unbundling that has hit cable television, challenged by a growing number of a la carte in-home entertainment options.

Cheaper computing power and reams of market data allow solo bankers to compete with big banks. Mr. Wood, who works out of his Bay Area house, and Mr. Culas have about a dozen employees between them.

The two men want the high-touch business of advising on deals, leaving to big banks the laborious, risky task of executing them. They arm clients with data about comparable transactions and often run auctions to solicit banks' lowest bids.

"It's changing the dynamics of the transaction completely," said Thad Trent, the chief financial officer of Cypress Semiconductor Corp., a San Jose, Calif. chip maker that hired Mr. Culas's firm last November for a deal. "It was the first time I felt like I had a level playing field with the banks."

Convertible bonds account for a small slice of investment-banking fees, which hit $38 billion last year, according to Dealogic. These hybrid instruments pay regular coupons like a bond, but in exchange for a lower interest rate -- at or near zero these days -- investors can swap them for shares if the stock hits a predetermined price.

It is the sort of business once thought to be out of reach for startups, which lack balance sheets to underwrite securities and investor networks to sell them to.

Bankers say their trading and lending operations enable them to offer broader services and better market intelligence about how deals will play out in the market. Privately, they have urged lawyers and other advisers not to work with independent advisers or risk losing business from their banks, according to people familiar with the matter. They have warned clients that independent advisers get hired by promising unrealistic terms that investors won't swallow.

Bankers pointed to Alteryx Inc.'s recent sale of $200 million of convertible bonds, when investors balked at aggressive terms negotiated by Mr. Culas. JPMorgan and Goldman were forced to discount the bonds, people familiar with the matter said, a chaotic offering that sparked selloff in Alteryx's shares and further reduced the value of the convertible bond.

"As a new issuer [of convertible bonds], we felt it would be beneficial to seek independent guidance," a spokeswoman for Alteryx said. "Shares reacted more negatively than expected but have since recovered, and we were very happy with the advice we received."

Capital-markets bankers are already feeling pinched. Companies are staying private longer, delaying the initial public offerings that generate big underwriting fees for banks. Competition has driven down fees on big trades and secondary offerings. Banks' revenue from U.S. stock offerings and related deals has fallen 38% since 2000, according to Dealogic.

A bright spot this year is convertible bonds like those sold by Twitter. Seventy-six companies have sold $27 billion worth this year, the most since 2008, according to Dealogic. More than half of this volume comes from Silicon Valley and other tech companies looking to capitalize on investor enthusiasm for their shares.

The instruments come in nearly infinite flavors, with different coupons and conversion triggers. Historically, that complexity has worked in favor of banks, which make money underwriting the bonds and providing an accompanying derivative.

"The most important service we provide is information," said Mr. Wood, who said clients often feel overwhelmed. "There are dozens of decision points. We help educate them on the pros and cons."

Mr. Wood said he spent two years working with software company RingCentral Inc. before it issued a $400 million convertible bond in March -- paying 0% interest. He also advised Okta, Inc., Twilio and Zendesk Inc. on recent offerings, while Mr. Culas worked for Square and Etsy, among others.

Some banks are trying to get ahead of the trend. Goldman last year launched an app, called Athena, that allows corporate executives to design their own share repurchases. CFOs can customize deals with their preferred features -- and, Goldman hopes, call the bank to execute it.

Write to Maureen Farrell at maureen.farrell@wsj.com and Liz Hoffman at liz.hoffman@wsj.com

(END) Dow Jones Newswires

June 25, 2018 07:14 ET (11:14 GMT)

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